THE COLLAPSE OF DREXEL BURNHAM LAMBERT

THE COLLAPSE OF DREXEL BURNHAM LAMBERT; Drexel, Symbol of Wall St. Era, Is Dismantling; Bankruptcy Filed

By KURT EICHENWALD

Published: February 14, 1990

Drexel Burnham Lambert Inc., the once-dominant investment house that fueled many of the biggest corporate takeovers of the 1980's, began selling off its securities yesterday, and its parent company filed for bankruptcy protection. The moves marked the demise of a firm that seemed to symbolize the fast-money era on Wall Street.

Drexel's securities business effectively collapsed yesterday after the parent company defaulted on $100 million in loans and other Wall Street firms sharply curbed their dealings with the investment house.

The parent, the Drexel Burnham Lambert Group Inc., filed for protection from its creditors under Chapter 11 of the Federal Bankruptcy Code late last night, a few hours after the company's board had approved the filing.

Subsidiaries Not Included

The parent's filing does not include the investment firm or a subsidiary that deals in securities issued by the United States Treasury. But unlike companies in other industries that file for bankruptcy, Drexel is not expected to re-emerge as a going concern, the firm's executives and lawyers said. More than most businesses, the survival of a securities firm, they explained, depends on the confidence of investors and other dealers; without that confidence, the business unravels quickly.

''After it's all over, Drexel will be left with cash, and a lot of laid-off employees,'' one executive at the firm said.

Accordingly, the investment house that pioneered the use of high-yield ''junk bonds'' to finance high-risk ventures yesterday started the tortuous process of closing down. Executives from a number of Wall Street firms visited Drexel, examining the securities holdings of Drexel for possible purchases.

Gathering Resumes

And many of the firm's 5,000 employees began to get their resumes together. ''Everybody's looking to go out of this place in a professional manner,'' one executive said.

Because Drexel employs thousands of people in New York, the news of the firm's collapse stirred concern among public officials in the region.

The demise of Drexel represents ''a sad day for New Yorkers and a sad day for the American financial system,'' said Representative Charles E. Schumer, the New York Democrat. ''It represents a significant blow to New York City's economy and marks the end of an era in American finance.''

The rapid collapse of the firm, which on Monday announced that it was seeking a merger partner because of a cash crunch, created fears among some Wall Street executives about the possible ripple effect on other firms. They said that with Drexel liquidating its huge junk bond portfolio, the value of other firms' holdings in the securities could well collapse.

''If forced sales take place, there may be a capital erosion problem starting,'' one Wall Street executive said. ''Drexel could end up taking some companies with it.''

Wall Street was stunned by the rapid decline of Drexel, but some executives said it was simply the way of the finance world. ''This is the nature of the financial services business,'' said Jeffrey B. Lane, president of Primerica Holdings and former president of Shearson Lehman Hutton Inc. ''You go into a steady decline, and then you fall off a cliff.''

The stock market shrugged off the news on Drexel, with the Dow Jones industrial average gaining 4.96 points, to close at 2,624.10.

Pioneer in Junk Bonds

Yesterday's developments underline the stunning turnaround at Drexel, which was one of Wall Street's most powerful firms until last year, when it settled criminal and civil charges of securities law violations.

Drexel rose from being a Wall Street also-ran in the late 1970's to become one of the nation's most profitable investment banks in the late 1980's as a creator of the modern junk bond market. Under the guidance of Michael R. Milken, former head of its junk bond division, Drexel became a primary player in the takeover battles that swept corporate America during the last decade. With Drexel's bonds, smaller companies that never before could have obtained financing were able to make bids for some of America's largest corporations.

But things started to come unstuck for Drexel in 1986, when the firm was caught up in the scandals that swept Wall Street after the fall of Ivan F. Boesky, the arbitrager. Mr. Boesky paid $100 million to settle charges of insider trading and agreed to testify against Drexel and Mr. Milken.

Milken Indictment

Last year, Drexel pleaded guilty to six felony counts, agreeing to pay $650 million. Mr. Milken was indicted on 98 counts of racketeering, securities fraud and other charges, and has left the firm.

The rapid collapse of Drexel was precipitated by financial dealings between the firm and its corporate parent. Drexel said the parent had assets of more than $3.6 billion and liabilities of more than $3 billion. Federal bankruptcy law permits a company to enter Chapter 11 if the assets exceed the liabilities when there is a prospect of insolvency.

The parent company - which had sizable holdings of junk bonds and other securities that had declined sharply in value and could not be easily sold - last week began to siphon some of the $500 million in capital that the investment bank held in excess of the amount Federal law required.